corporate breakups - amazon s3...breakups in the next year. • most corporate breakups are expected...

VENUE® Market Spotlight

CORPORATE BREAKUPSMarch 2015 Edition

VENUE® Market Spotlight: Corporate Breakups

CONTENTSWelcome 3

Foreword 4

Survey 5

Notable Q1, 2015 deals in the room 9

About RR Donnelley 10

3

WELCOMEDear Valued Reader,

Welcome to the March 2015 edition of the Venue Market Spotlight. This month’s issue will look at the recent rise in corporate breakups.

Corporates are currently under close scrutiny. Partly due to the increase in public shareholder activist campaigns, these companies’ financial performance is now closely monitored for any sign of deterioration. In fact, according to a report jointly released by Schulte Roth & Zabel LLP and Activist Insight, the number of companies targeted by activist investors worldwide rose to 344 in 2014 compared with 291 in 2013.

With these factors at play, companies have had to come up with various strategies to boost revenues and curtail costly operational expenses. A corporate breakup is one of the ways in which firms can unlock value by focusing on core competencies and separating out sub-performing assets.

It is not surprising then that in this month’s Spotlight, respondents expect that these deals will rise over the next 12 months. These projections are supported by Mergermarket data that says North American corporate breakups rose by 77% year-over-year in 2014 to their highest level in six years. Last year’s largest deal was student loan lender SLM Corporation’s US$6.4bn spinoff of its business education loan management unit Navient Corporation into a new company. Post breakup, SLM is now solely focused on its consumer banking business. The separation allowed both companies “to better capitalize on strategic opportunities,” says the firm’s president and CEO Jack Remondi.

Whether prompted by an activist investor or simply used as a way to get back to a company’s core strengths, these breakups are becoming a viable and more common option for corporates wanting to improve their businesses.

At RR Donnelley, we make sure that the needs of every business are met. Our company has served as a partner to all kinds of complex transactions and is familiar with the various difficulties that these deals bring forth. With our array of services that include the Venue virtual data room, we can support large and complex M&A transactions. We are looking forward to catering to our customers’ every need and helping them efficiently and effectively ride this deal-making wave for the rest of 2015.

Sincerely,

Tom JuhasePresident, Financial Services GroupRR Donnelley


FOREWORDTo breakup or to stay intact is a question that many companies are asking themselves given the current volatile economic environment and growing scrutiny of public corporations’ performance. Companies have resorted to breakups as a way to gain good standing with their investors by improving shareholder value.

It is not surprising then that a significant number of respondents in this month’s Spotlight expect these types of transactions to increase in the next 12 months.

Breakups can serve as a way for companies to unlock value by separating out the good and the bad performers within their organization, and focus on each one’s key strengths. Indeed, there are many examples of firms across industries that have either considered or taken this route in recent times, some of which are discussed in this report. For instance, Armstrong World Industries in February said that it will breakup its flooring and ceilings businesses, a move that the company said will allow it to have better strategic focus.

Other findings of the survey are as follows:• Fifty-six percent of respondents expect Technology, Media and Telecommunications

(TMT) to be the sector where the most corporate breakups will happen in the next 12 months. This is followed by energy, which 48% say will see the most corporate breakups in the next year.

• Most corporate breakups are expected to happen in the over US$5bn range, according to over half of respondents (56%).

• Forty-four percent of respondents believe Europe will see the most corporate breakups in the next 12 months. North America is next with 40% and Asia-Pacific with 16%.

Breakups offer corporates a way to streamline businesses, respond more readily to their customers’ demands and focus on their core expertise, leading the way for uninterrupted growth.

56% of respondents expect TMT to be the sector where the most corporate breakups will happen in the next 12 months.

5

What do you expect to happen to the volume of corporate breakups in the next 12 months?

An overwhelming majority of respondents (92%) believe that corporate breakups will rise over the next 12 months. The expected increase comes as many firms recover from the economic downturn and use this strategy to turn their businesses around by scaling down unwieldy units. It is also a way to minimize the risks of large-scale operations. “Companies are downsizing to reduce the costs, risks and pressure on management while ensuring the efficiency and enhancing the value of their business segments,” says a US-based director of corporate development.

On top of this, companies are breaking up to remain competitive and to cope with changing demands in their respective sectors. For instance, last year, technology firm Symantec split its security and information management businesses to focus on the former. In a press release regarding the transaction, the firm’s president and chief executive officer Michael Brown explained the move: “As the security and storage industries continue to change at an accelerating pace, Symantec’s security and IM businesses each face unique market opportunities and challenges. It has become clear that winning in both security and information management requires distinct strategies, focused investments and go-to market innovation.”

In which sector(s) do you expect to see the most corporate breakups in the next 12 months? [Select top two]

The two sectors that will see the most corporate breakups in the next year are TMT (56%), and energy (48%) according to respondents.

On the TMT end, many of the bigger companies are unable to cope with the market’s changing demands. A breakup gives them the focus and agility to create new products that cater to consumers’ evolving needs. A recent example is Hewlett-Packard, which split its corporate services and personal computer segments. CEO Meg Whitman said in a release on the split that the separation will offer the newly formed companies “the independence, focus, financial resources, and flexibility they need to adapt quickly to market and customer dynamics, while generating long-term value for shareholders.”

In energy, falling oil prices have hit these firms’ bottom line, compelling many of them to restructure their businesses. For instance, oil and gas producer Apache sold stakes in many of its natural gas export assets around the world to focus on its North American operations.

SURVEY

Significantly increase

Somewhat increase

Remain the same

68%

24%

8%

0 10 20 30 40 50 60

Other

Transportation

Consumer

Life Sciences & Healthcare

Industrials and chemicals

Financial services

Energy

Technology, mediaand telecommunications 56%

36%

48%

24%

20%

8%

4%

4%

Percentage of respondents


In which company size range do you expect most corporate breakups to occur in the next 12 months?

Survey results reveal that breakups are skewed toward larger companies. Just over half of respondents (56%) say that corporate breakups will be most frequent in the over US$5bn company range while 28% believe they will be in the US$1bn to US$5bn range.

Companies in the over US$5bn range have a lot more moving parts that need to be managed. “The burden of overseeing complexities in bigger corporations is diverting their focus away from the core areas,” says a Europe-based M&A professional in an energy services firm. “Management teams find it hard to maximize the performance of some units, so these businesses might opt for a corporate breakup.”

Performance is also an issue for companies in the US$1bn to US$5bn range. An Asia-Pacific-based director of M&A says firms in this range will use corporate breakups to address revenue gaps and competitive pressures. “These challenges put companies in a tight spot and they would find alternative ways to recover losses and gain profits,” he says.

SURVEY (CONTINUED)

In which region do you expect to see the most corporate breakups in the next 12 months?

Companies in Europe look set to see the most corporate breakups in the next year according to 44% of respondents. This was closely followed by North America (40%), while Asia-Pacific breakups were considered less likely (16%).

Macroeconomic troubles have negatively affected company performance, causing European firms to explore separating out sub-performing divisions. “The slow-growing economies and increased capital costs have spurred the decision to take the breakup route,” says a finance director at a European manufacturer. A recent case is British-Dutch consumer goods firm Unilever’s plans to form a standalone business unit for its North American and European spreads segment.

Like their European counterparts, North American companies are also focused on improving performance. A US-based M&A executive in a news organization says, “Major players in North American media, including Viacom and Time Warner, have gone through breakups for the same reasons – to reduce operational pressure and emphasize more promising areas.”

Europe

North America

Asia-Pacific

US$101-US$500m

US$501m-US999m

US$1bn- US$5bn

US$5bn+

8%

8%

28%

56%

16%

44%

40%

7

CORE COMPETENCIES BIGGEST DRIVER OF BREAKUPS

What will be the biggest drivers of corporate breakups in the next 12 months? (Select top two)

One of the greatest drivers for corporate breakups will be companies focusing on core competencies, according to 48% of respondents. Elsewhere, 44% believe a key consideration for these deals will be unlocking value by separating out underperforming units.

More and more companies are starting to closely assess how different businesses within their firms are doing. In doing this, they are deciding which divisions they need to cut. “Splitting off non-profitable units allows a better focus on core operations and leads to uninterrupted growth,” says a corporate development director at an industrial firm. Procter & Gamble had this in mind, for instance, when the conglomerate announced a plan last August to cut out 100 smaller brands to improve its overall sales performance.

What will be the biggest challenges/risks to corporate breakups in the next 12 months? (Select top two)

Despite the advantages of breakups, they come with inherent challenges. Almost half (48%) of respondents believe losing synergies within companies as the biggest challenge to corporate breakups in the next 12 months, while diminishing market value was cited by 32% of survey respondents.

Breakups can mean removing the benefits of working together as a unit. “Eliminating synergies has a negative impact on the business and can reduce its scope to a great extent,” says an M&A director at a healthcare company.

Diminishing market value is also a concern for companies when they create standalone entities. This is a concern for JP Morgan when the bank rebutted repeated calls for it to breakup. On the bank’s investor day in February, CFO Marianne Lake said that breaking the bank up would mean needing two of everything including two finance, audit and risk functions, among other things. These are not “trivial things,” she said, citing the significance and cost of the undertaking.

0 10 20 30 40 50 60

Lack of growth avenuesfor spun-off entity

Removing cost savingsachieved through scale

Losing benefit of diversification

Delineating/separating humanand other company resources

Losing financial backing

Losing competitive advantage

Diminishing market value

Eliminating synergieswithin larger company 48%

28%

32%

28%

20%

16%

20%

4%

0 10 20 30 40 50 60

Generating tax benefits

Lowering cost of capital

Attracting more capitalfrom investors

Prompting fromshareholder activists

Accelerating growth

Improving operationalefficiency

Unlocking value by separatingoutunderperforming units

Focusing on core competencies 48%

32%

44%

24%

24%

12%

12%

4%

Percentage of respondentsPercentage of respondents

888.773.8379www.rrdonnelley.comwww.venue.rrd.comCopyright © 2015 R. R. Donnelley & Sons Company. All rights reserved.

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Notable Q1, 2015 deals in the roomVenue® data room: A special report

Advantage Sales & Marketing LLC acquires The Linkage Group Inc.

March 5, 2015

Target: The Linkage Group Inc.Private Equity Firm for Buyer: CVC Capital Partners Limited; Juggernaut Capital Partners L.P.; Leonard Green & Partners LP Industry: Consumer: Retail; Services (other)

Philips acquires Volcano

February 17, 2015

Financial Advisor for Target: Goldman Sachs Counsel for Target: Cleary Gottlieb Steen & Hamilton LLPFinancial Advisor for Buyer: Bank of America Merrill Lynch; LazardCounsel for Buyer: De Brauw Blackstone Westbroek; Sullivan & CromwellIndustry: Medical; Medical equipment and services; Telecommunications: Hardware

Kite Realty Group Trust acquires Inland Diversified

Real Estate February 10, 2015

Financial Advisor for Target: Wells Fargo Securities, LLC

Counsel for Target: Alston & Bird LLP; White & Case LLP

Financial Advisor for Buyer: Bank of America Merrill Lynch; Barclays

Counsel for Buyer: Hogan Lovells Interna-tional LLP; Shearman & Sterling LLP

Industry: Real estate

Axis Capital and PartnerRe mergeJanuary 26, 2015

Financial Advisor for Target: Credit Suisse Counsel for Target: Appleby; Davis Polk & Wardwell LLP; Skadden Arps Slate Mea-gher & Flom LLP Financial Advisor for Buyer: Goldman Sachs Counsel for Buyer: Conyers Dill & Pearman; Simpson Thacher & Bartlett LLP Industry: Financial Services; Insurance related

PayPal acquires PaydiantMarch 2, 2015

Target: Paydiant, Inc.Counsel for Target: Goodwin Procter LLP Counsel for Buyer: Sidley Austin LLP Private Equity Firm for Seller: General Catalyst Partners; North Bridge Venture Partners; West Capital Advisors LLC; Stage 1 Ventures, LLC Industry: Computer software; Internet /ecommerce; Services (other)

Microsoft Corporation acquires Equivio Inc.

January 20, 2015

Industry: Computer software; Application software products; Software development

NXP Semiconductors N.V. acquires Freescale Semiconductor Inc.

March 2, 2015

Financial Advisor for Target: Morgan Stanley

Counsel for Target: Houthoff Buruma; Skadden Arps Slate Meagher & Flom LLP

Financial Advisor for Buyer: Credit Suisse

Counsel for Buyer: Davis Polk & Wardwell LLP; De Brauw Blackstone Westbroek; Simpson Thacher & Bartlett LLP

Debt Provider (Other): Credit Suisse

Industry: Computer: Semiconductors; Telecommunica-tions: Carriers; Semiconductors

Hewlett-Packard Company acquires Voltage Security, Inc.

February 9, 2015

Target: Voltage SecurityCounsel for Buyer: Skadden Arps Slate Meagher & Flom LLPPrivate Equity Firm for Seller(s): Morgen-thaler Ventures; Menlo Ventures; Siemens Venture Capital GmbH; Trident Capital, Inc.; Hummer Winblad Venture Partners; Cipio Partners GmbHIndustry: Computer services; Computer software; Data processing; Application software products; Software development

CBRE acquires United Commercial Realty

January 16, 2013

Industry: Real Estate; Consulting services (excl. IT consulting)

Deals. Done. Simple.

For more information:Please contact your RR Donnelley Sales Rep.Call 1.888.773.8379

Or visit www.venue.rrd.comVenue demo (audio enabled):http://www.rrdonnelley.com/venue/Resources/ProductDemo.asp



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RR DONNELLEY AT A GLANCE

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